Getting Out of Corridor Funding
To strengthen the retirement security of all educators, we need to stop relying on the corridor funding method and fully fund the state contribution to the pension system.
Corridor funding began a decade ago when the state pension fund was nearly fully funded. Corridor funding allowed the state to contribute less annually to the fund than the actuaries recommended. The shortfall played a major role in increasing the state’s unfunded liabilities and, therefore, its future costs.
The pension fund is 65% funded as of June 30, 2012. Because of the 2011 pension reforms, which included increased contributions by educators, the fund is on track to be 80% funded within 10 years, and fully funded in about 20 years. Getting out of corridor funding would be a major step in further strengthening and stabilizing the pension fund.
Moreover, phasing out of corridor funding will create long-term savings for the state of nearly half a billion dollars over the next five years, while also protecting educators’ retirement security over the long run. It’s time to put a stop to corridor funding and stand up for educators’ retirement security.
The General Assembly's 2012 special session included legislation which shares teacher pension costs with local governments. The shift includes a four-year phase-in to share the employer portion of normal costs with local school boards. The plan phases in 50 percent of normal cost in FY13, 65 percent in FY14, 85 percent in FY15, and the full 100 percent of normal costs in FY16.
For each year of the phase-in, county governments will meet their maintenance of effort (MOE) obligation and must pay the cost of the pension bill shifted to the school board. In FY17, after the phase-in is complete, the MOE calculation will be increased to include the normal costs in that year, thereby creating a new MOE value moving forward. This critical provision of the law protects valuable resources for students and schools by preventing local governments from using school funding to pay for their share of pension costs.
By shifting to the employer share of normal costs, the General Assembly identified a factor in the pension formula that is both predictable and declining. The General Assembly also provided local offsets to assist counties in the increased costs starting in FY13.
Significantly, this legislation shifts hundreds of millions of dollars less to the counties than the governor’s original pension shift proposal or other shift proposals considered in Annapolis. The impact of a cost shift on county finances and bond ratings is greatly minimized, and is structured so that the additional costs would be prevented from supplanting resources going to our schools.
Read about MSEA's July 2011 letter to the governor and legislative leaders in response to the final report issued by the Public Employees’ and Retirees’ Benefit Sustainability Commission.
The letter stressed the importance of ensuring a sustainable pension system for the state; providing educators with retirement security and maintaining an important retention incentive; and not upsetting the flow of classroom resources. Learn more.
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